About half of the world’s adults lack bank accounts. Most of these “unbanked” are deemed too expensive to serve, or not worth the hassle created by banking regulations. But what may be good business from a banker’s perspective isn’t necessarily what’s best for society. The inequalities that persist in financial access reinforce broader inequalities in the distribution of income and wealth. This is the opening for microfinance – and also its challenge.

Impact evaluations try to measure the change in a participant’s life that occurred because of an intervention. The “intervention” could be a policy, a project, an insurance product, or a specific feature of a product. For instance, the intervention could relate to a particular product feature, such as the extent of coverage, a change of pricing structure, or variations in the distribution channel. . .

Can the poorest be reached with finance? "Ultra poor" members of society face a series of constraints and deprivations that distinguish them from the general poor. Limited social networks, chronic malnutrition, and reliance on patronage systems characterize a socioeconomic class that is hard to "bank."

It’s not surprising that saving is hard for many of us. We’re impatient, temptations are at hand, and savings devices are seldom ideal. By the same token, it would not be surprising to find that we have a hard time keeping money in the bank. But, puzzlingly, new studies give examples of people withdrawing funds less often than neoclassical economic theory suggests they should (e.g., relative to the simulations of optimal savings in Deaton 1991). And, paradoxically, it is often the same people who had trouble saving who also have trouble drawing down their savings. Some are so reluctant to dis-save that they willingly borrow at expensive interest rates to avoid touching their savings.

Sukhwinder Singh Arora, co-author of two books Small Customer, Big Market: Commercial Banks in Microfinance (with Malcolm Harper) and The Poor and their Money (with Stuart Rutherford) talks about how the lessons from Portfolios of the Poor help providers design better products.

Stuart Rutherford, co-author of Portfolios of the Poor, discusses three MFIs that have redesigned their products to more adequately meet the three fundamental challenges poor households face. These challenges are outlined in Part 3 of this video series: Identifying and Meeting the Financial Needs of the Poor.

Stuart Rutherford outlines the three major challenges Portfolios of the Poor authors continually observed among diarists: 1) extreme poverty is not only about being very poor, but about managing daily expenses with unpredictable earnings and unreliable jobs: 2) the hardships of limited earnings are compounded by emergencies to which the poor are so vulnerable, forcing already-poor households to patch together an adequate level of cash; and 3) low wages and frequent emergencies prevent households from assembling usefully large sums for bigger expenses, such as housing, marriages, and education, etc.

Co-author Stuart Rutherford identifies the key lessons from Portfolios of the Poor and highlights misconceptions about the financial practices of poor households that its research helped to correct. Rutherford also answers questions about the diverse and complex saving methods employed by Portfolio diarists.

Bob Christen, director of the Financial Services for the Poor Initiative at Bill & Melinda Gates Foundation, offers a thoughtful introduction to Portfolios of the Poor. Critical to the value of microfinance, he states, is the recognition and understanding of the nuances in the financial lives of the poor: broader financial inclusion can be achieved in ways that extend beyond loans for investment purposes. Portfolios revealed that what poor households need are better ways to manage and save their limited resources. Christen emphasizes that with this awareness, microfinance practioners can design a better generation of financial instruments for the poor, and identifies Portfolios of the Poor as the "guide" to achieve this goal.

Yaw Nyarko, Professor of Economics at New York University and Director of NYU Africa House, talks about the particulars of the research for Portfolios of the Poor and how it will influence the development of new research trends.

The Grameen Bank of Bangladesh is the best-known and most widely imitated microfinance pioneer. But Grameen found itself in trouble in the late 1990s as the quality of its loan portfolio began to decline sharply, and a devastating flood further eroded loan repayments. It responded by adopting a new model in 2001, dubbed Grameen II. Grameen II was designed to be more flexible than the original model: aligning repayment schedules with household income flow, meeting the demand for secure and reliable savings products, and acknowledging the varied needs of clients. These new features were a shift from beliefs underpinning the original Grameen model, which emphasized the need for loans over savings, expectations that loans would be used only for micro-entrepreneurial investment, and the necessity of a strict repayment regiment. The research in Portfolios of the Poor includes sets of financial diaries collected from Grameen clients both before and after these changes, from 1999-2005.

How do the world’s poorest households manage their financial lives on $1 and $2 a day? The authors of Portfolios of the Poor tracked the earning, borrowing, spending, and saving practices of 250 households in Bangladesh, India, and South Africa. The resulting “financial diaries” reflect a mixed-research methodology that is systematic in data collection, and simultaneously captures the complexity of people’s lives. This brief takes a closer look at the research samples from all three countries.

The financial diaries provide insight into the prices poor households paid for financial instruments, and the logic behind their financial decisions. Researchers revealed that surviving on small, irregular, and unpredictable earnings often generates financial behaviors that at first seem counter-intuitive-such as paying or borrowing to save. Through the financial diaries approach, (see the “Research Methodology” Briefing Note) researchers were forced to confront assumptions and take a fresh look at understanding the price of microfinance-paying close attention to what price means to poor households, the cost financial institutions assume in lending to the poor, and the universal tension between the impatience to meet financial demands today, and the desire to save for the future.

When it is difficult to save, those who manage to build up a lump sum are reluctant to draw down on it. In fact, they are often so loathe to touch their savings that they willingly borrow at expensive interest rates. While the phenomenon of borrowing while saving is puzzling from the standpoint of traditional economics, it’s a regular feature in the financial diaries described in Portfolios of the Poor: How the World’s Poor Live on $2 a Day. This brief describes simultaneous borrowing and saving, and provides evidence for an explanation rooted in the difficulty of rebuilding savings. This evidence leads to another seeming contradiction—why high interest rates on loans may in fact be a desirable attribute for some borrowers.

Portfolios of the Poor: How the World’s Poor Live on $2 a Day examines the basic question of how the world’s poorest households survive on such modest incomes. The authors report on yearlong "financial diaries" of villagers and slum dwellers in Bangladesh, India, and South Africa-surveys that track penny by penny how households manage their money (see Research Methodologies Briefing Note). The stories of these families are often surprising and sometimes inspiring. Most poor households do not live hand to mouth, spending what they earn in a desperate bid to keep afloat. Instead, they rely upon an array of complex tools, and lead active financial lives because they are poor, not in spite of it. They create “portfolios” that leverage both informal networks and formal institutions to address their immediate and long-term needs.

This brief offers insight into the ways poor households manage risks. Based on the financial diaries research outlined in Portfolios of the Poor: How the World’s Poor Live on $2 a Day (see the "Research Methodologies" Briefing Note), this brief describes the formal and informal risk management tools used by poor households in Bangladesh, India and South Africa, and examines how these tools can be improved to help the poor mitigate risk and plan for the future.

The Portfolios of the Poor financial diaries in Bangladesh span 1999-2005. As well as giving a unique insight into the challenges faced by poor households, they show how the households interact with the uniquely saturated and rapidly growing microfinance industry in the country. Unlike many studies of microfinance that feature poor Bangladeshi households, these financial diaries depict the entire financial picture, showing how they use microfinance alongside the many informal financing mechanisms and the few formal services available to the poor.

Portfolios of the Poor offers new thinking about how the world’s poorest communities manage their financial lives. To uncover these intimate details, researchers designed a study in which they interviewed poor households twice a month over the course of a year, and recorded the details of how they lived their financial lives. These “financial diaries” encompass data from nearly 250 households in Bangladesh, India, and South Africa, and reflect a mixed-research methodology that is systematic in data collection while simultaneously captures the complexity of people’s lives.

Attempts to broaden financial access in poor communities usually take one of two directions. The first is providing credit to small- scale microenterprises, an idea pioneered by Bangladesh’s Grameen Bank. The second involves fostering long-term saving for education, housing, or other worthy goals. But low-income families usually have a more fundamental financial need, one that families often pay dearly for: basic, reliable ways to manage cash flow.